You may remember that in February last year, the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill was introduced including changes to research and development (R&D) tax losses. This was finally enacted in February this year and Tax Policy has released a special report on this last month.
The new rules will enable tax loss-making R&D companies to convert their tax losses into cash. Historically, start-up companies can spend a lot of money on R&D and, whilst they may get a tax loss benefit, the cash benefit of this can take some time to realise.
Some of the key criteria for eligibility are that:
- the entity must be a company resident in New Zealand. This tax break is not available to other business structures, however, it may be available to groups that include LTC’s or limited partnerships
- the company must have a net loss in the tax year
- at least 20% of the company’s wage cost must be for work relating to the R&D activity
For eligible companies, the benefits can be significant – starting at cashing out of up to $500,000 of losses in the 2016 tax year with a total cash-out of up to $2million over the next 5 years. At the current company tax rate of 28%, this can equate to a cash payment of up to $560,000.
There will be claw-back of the benefit in certain circumstances, e.g. when the company starts paying tax or if R&D assets are disposed.
The rules are aimed at start-up firms engaging in intensive R&D activities. Whilst the benefit is only a timing difference, with cashflow in these types of entities typically being tight, the changes will be very welcome. It remains to be seen how many companies will meet the criteria to take advantage of these rules.